GST distribution reforms

Appendix A Public engagement is in the interim report.

The 2018 GST distribution reforms have achieved almost none of their objectives and have made the system less equitable and more complex while costing Australian taxpayers almost $23 billion to 2024-25, according to the interim report of a Productivity Commission inquiry.

The interim report of the inquiry into the 2018 GST distribution reforms says the government should move towards the pre-2018 system but make targeted changes to address key issues.

‘The 2018 changes reshaped a system that needed targeted reform, leaving taxpayers with a large and growing bill. The system should be brought back to its core purpose: ensuring that all states and territories are able to offer Australians a similar standard of services and infrastructure no matter where they live,’ said Productivity Commission Deputy Chair Dr Alex Robson.

The PC was asked to assess whether the changes were working efficiently, effectively and as intended.

‘The 2018 changes have largely not achieved their goals and have cost more than 4 times as much as projected,’ said Dr Robson. 

Changes have created ‘two sets of rules’

The report finds that the 2018 changes have undermined the main purpose of the GST distribution system.

'Just as the pension supports people in retirement and child care subsidies support access to early education and care, GST payments were designed to give states the funds to provide a similar standard of services and infrastructure,' said Dr Robson.

'The 2018 changes tried to achieve too much and moved too far away from the system’s core objective. The result is a system that is now more complex, less consistent and more costly. If the government wants to support other objectives, they could do so outside the GST distribution system,' said Dr Robson.

Under the 2018 legislation, no state can receive less GST per person than the fiscally stronger of New South Wales or Victoria. Since 2018, this change has only benefited Western Australia.

The report finds that prior to 2018, all states received enough GST revenue to meet 100% of their assessed fiscal needs. But following the reforms, Western Australia received enough GST revenue to meet 113% of its assessed fiscal needs in 2024-25 – compared with 98% for other states.

While payments from the federal government have ensured that other states are no worse off compared to the pre-2018 system, the other states would have required about $47 billion in additional funding in 2024-25 alone to lift them to the same fiscal capacity as Western Australia.

‘The GST system is now built on two sets of rules: one for states in a better fiscal position than Victoria and New South Wales, such as Western Australia, and another for everyone else,’ said Commissioner Dr Angela Jackson.

‘If a state like South Australia improves its fiscal position, they get less GST because they are considered to need it less. If Western Australia improves its fiscal position, they either don’t lose any GST or potentially receive even more,’ said Dr Jackson.

The interim report shows that in some cases the ‘standard state benchmark’ – which ties Western Australia's GST share to the stronger of New South Wales or Victoria – turns the logic of GST distribution upside down. 

‘Under the current system, if New South Wales is hit by a natural disaster and spends money on the recovery, it receives more GST to reflect its increased need. But under the standard state benchmark, Western Australia also receives more GST from the other states, for a natural disaster it didn’t have,’ said Dr Jackson.   

A large and ongoing cost 

The interim report finds that to 2024-25, the GST reforms cost the Australian Government almost $23 billion – more than 4 times what was expected. While the 2018 changes were intended to make all states better off, the report finds that only Western Australia benefited financially.

The extra payments to Western Australia come from the GST pool; the additional $23 billion cost is largely made up of ‘No Worse Off’ payments that the Australian Government pays to the states and territories to compensate them for this loss of revenue.

‘The extra $6.4 billion spent in 2024‑25 could have delivered a tax cut of more than $450 for each Australian taxpayer,’ said Dr Robson.

This cost is tied to the global iron ore price and is potentially uncapped. If the No Worse Off payments end in 2029-30 as currently planned, that uncapped cost burden will shift to the states. 

‘No Worse Off payments currently cost about $6 billion each year, but if iron ore prices or production volumes rise, they could reach $12 billion per year,’ said Dr Robson.

The 2018 changes were also designed to make annual distributions to states more predictable. The interim report finds that the reforms have only substantially decreased this volatility for Western Australia, and they have done this at the expense of the Australian Government.

Addressing key issues

The interim report investigates concerns that the GST distribution system disincentivises states to reform and grow their economies because they could lose GST revenue. The report finds little evidence that the GST system has influenced state policy decisions. 

However, the interim report does identify issues that arise when one state dominates a particular revenue source, like mining, which are known as 'dominant-state effects'. For example, when a state that is dominant in mining increases their mineral royalty rate, it will reduce their future GST payments by more than changes to revenue sources they are not dominant in, like payroll tax.

‘These dominant-state effects are a genuine issue, but they warrant a targeted and transparent response,’ said Dr Robson.  

Interim recommendations

The interim report recommends that the government transition back to the pre-2018 system but that the Treasurer direct the Commonwealth Grants Commission to address costly dominant-state effects where they arise, such as in the mining assessment. 

Failing this, it recommends the government return to the pre-2018 system but commit to make direct and transparent payments to states it considers to be affected by dominant state effects.

If the government does not want to pursue either of these two options, the report recommends removing the standard state benchmark. This would re-activate the 0.75 ‘relativity floor’. If the government takes this route, they should also make the No Worse Off payments permanent so that the states are not left to pay for the consequences of the 2018 changes. 

Submissions to inform the final report are now open. The final report is due to be delivered to the Australian Government by 31 December 2026.

Preliminaries: Cover, Copyright and publication detail, Opportunity for comment, Terms of reference, Disclosure of interests, Acknowledgements, AI disclosure, and Contents

Executive summary

1. Horizontal Fiscal Equalisation in Australia
   • 1.1 Australia’s system of fiscal transfers
   • 1.2 The HFE system was under pressure prior to the 2018 reforms
2. Impacts of the 2018 reforms
   • 2.1 The intent of the 2018 reforms was not explicitly defined
   • 2.2 The 2018 reforms have so far had several (primarily negative) impacts on Australia’s GST distribution system
   • 2.3 The 2018 reforms are not operating efficiently, effectively or as intended
3. The PC’s assessment of the current system
   • 3.1 The framework for assessing GST distribution systems
   • 3.2 HFE can support equality of opportunity in Australia, but this is reduced by the current system
   • 3.3 HFE is broadly policy neutral
   • 3.4 Considering fiscal sustainability is necessary, given how much the GST distribution impacts government budgets
   • 3.5 The GST distribution has limited impact on states’ already reasonable revenue certainty
   • 3.6 The current system reduces equalisation, with limited gains against other framework objectives
4. Assessing alternative GST distribution arrangements
   • 4.1 Assessing the current system, with and without the NoWO guarantee
   • 4.2 Assessing the current system with minimum changes to address critical issues with the system
   • 4.3 Alternative arrangements
   • 4.4 Preliminary findings and recommendations
   • 4.5 Implementation considerations
5. Governance arrangements for an effective FFR system
   • 5.1 The CGC’s approach to exercising its key functions is broadly sound
   • 5.2 The extent that the HFE system may be contributing to diverging outcomes should be monitored
   • 5.3 Non GST Commonwealth payments can be administered more efficiently
   • 5.4 CFFR’s role in the FFR system is diminishing
   • 5.5 Governments should take steps to improve their fiscal transparency

• A. Public engagement
• Abbreviations
• Glossary
• References

Appendices B to E and the supporting paper for chapter 1 are referenced in the report but are available only on this web page as separate documents to the report.

1. B. The inquiry’s framework
2. C. PC modelling
3. D. State fiscal sustainability
4. E. Commonwealth payments
5. Supporting paper 1: Understanding Australia’s system of fiscal transfers

Printed copies of this report can be purchased from Canprint Communications.